Rollover roadblock: the IRS puts a snag in the Pension Protection Act's provision allowing direct 401(k) rollovers to nonspouses.

When President Bush signed the Pension Protection Act into law last August, the Human Rights Campaign and others touted the provision that allows employees to roll over their 401(k)s upon death to nonspouse beneficiaries as a major step forward for LGBT equality. But according to new Internal Revenue Service guidelines released in January, when the PPA went into effect, rolling over a 401(k) to a same-sex partner's IRA or another retirement fund to avoid tax penalties is not automatic--companies must first authorize it. For many LGBT employees, that means the much-ballyhooed benefit is far from a sure thing.

"The IRS decision takes the teeth out of what we were hoping for," says gay financial adviser Joe Kapp of Vienna, Va., a Washington, D.C., suburb, who has a large gay and lesbian clientele. (An IRS spokesperson declined to comment on the decision, saying the agency does not explain its rulings.) Although the nonspouse rollover option is "still a gain, it's not nearly as broad as we would have liked. Changing a company's plan documents, which is probably the most important part, is going to take the longest amount of time and require quite a bit of education."

The rollover provision of the PPA was designed to give nonspouses the same taxfree access to deceased employees' 401(k) holdings that husbands and wives enjoy. Before the law, the surviving partner of a same-sex couple would have had to withdraw proceeds in one lump sum, incurring a heavy tax burden. Now, ostensibly, he or she can roll the money directly into an IRA and draw from the funds over time.

That is, if the company that provided the 401(k) allows it. The federal government, with roughly 3.2 million participants enrolled in its 401(k)-like Thrift Savings Plan, has already incorporated the rollover option, as have accounting giant Ernst & Young and defense contractor Raytheon (both of which, not coincidentally, scored perfect 100s on the most recent HRC Corporate Equality Index). But many other large employers have yet to deal with it.

Exxon Mobil, for instance, which has a dismal record on gay issues, plans to "decide in a couple of months" whether to add the option, a spokesperson said (although days later he said that it was already in place), while the Nielsen Co. is "looking into adopting" it but first wants to make sure its retirement plan administrator, Fidelity, is set up to allow such rollovers. (A spokesperson for Fidelity said it was.) At American Express, the rollover option is "currently not something we're offering," said a spokesperson, adding that the issue would be revisited in "the next couple of months." Representatives from other gayfriendly companies such as Bank of America and Coca-Cola declined to comment.

And that's the situation with Fortune 500 companies. Gay employees at smaller and midsize businesses without plan administrators or dedicated benefits departments are likely to experience even more uncertainty, Kapp says.

None of this was foreseen back in August, when the PPA was hailed as an unqualified victory. "There is a large group of Americans that are left behind in traditional pension benefit models," one of the law's major contributors, Sen. Gordon Smith, said at the time. "We need to do better to keep these groups from falling through the cracks."

But because of the IRS decision, will that happen anyway? HRC, which successfully lobbied for the rollover provision, doesn't think so. "Our understanding from the benefits community is that they are overwhelmingly making their plans consistent with the law," says Lara Schwartz, HRC chief legislative counsel. At Merrill Lynch and Vanguard, which together manage some 5.5 million individual 401(k) accounts for employees at various companies, the rollover option is now the default.

But what if that's not the case at your company? Kapp advises reaching out to your human resources department, to an LGBT affinity group within the company, or to the highest-ranking openly gay employee and making him or her aware of the issue. If it's a really small company, Kapp suggests going right to the top and asking the owner to look into it. "If you're not proactive about this and something happens to you and you pass away unexpectedly," he says, "your partner could experience a huge, unnecessary tax bite."

--William Henderson, with additional reporting by Paul Florez